One of the tax areas that may be scrutinized by the IRS is deducting meals, travel, and entertainment. There is an extensive 13-page IRS guideline for all the details- Publication 463, Travel, Entertainment, Gift, and Car Expenses-Our short article on this topic may help you know if you need to research further.
How to write off Business Travel Expenses:
If your business requires that you are away from home long enough to stay overnight, you are eligible for tax deductions related to this travel. For tax purposes, your home is your regular place of business, regardless of where you live. These expenses are deductible to the person/entity that incurred the expenses. If your employer reimburses you then you may not have a deduction.
For small businesses, many times it is the owner (partner/shareholder) that is traveling for business. Assuming that you were away from your tax home long enough to stay overnight, you are entitled to deduct the following travel expenses (some rules for international travel are different)
1. Mode of Transportation-Planes, trains, and automobiles: You don’t have to choose the cheapest option, but you do have to choose a reasonable option. First class is generally permissible, but you will have trouble if you deduct a two-week cruise you took en route to the meeting. Also, you can’t deduct a ticket purchased with frequent flier miles that cost you nothing.
2. Meals: 50% of the costs of meals related to travel are deductible. This includes tip and tax. If you are taking a client to dinner, document business discussion. Using an electronic calendar such as google will help as the events are usually already on your calendar. Just add notes as to who, what, where and you will have a completed record. Do you have to keep a receipt? Using a credit card does document it somewhat, but it is recommended that receipts be retained. These can also be retained by taking a photo of it with your phone and then attaching to your electronic calendar event.
As an alternative to documenting exact cost of meals for travel, the IRS offers an option to deduct a set amount for meals each day. For 2016, the average standard meal deduction for most cities in the United States is $62.50. This isn’t an option for travel outside of the continental United States. Spouse’s meals are only deductible if the spouse serves a business purpose.
3. Hotels, Motels, etc.: Deduct your lodging expenses for any business trip that is long enough to require an overnight stay. If you bring a spouse or partner who doesn’t have a business reason to be with you, you can only deduct the cost of the room you would pay for if traveling alone.
4. Other deductible expenses:
- Transportation between airport and your hotel and between hotel and the work location. If you use your car, you can deduct business related mileage, parking, and tolls.
- Shipping baggage and meeting materials.
- Dry cleaning and laundry
- Business calls
- Tickets. Only face value can be deducted. Service charges and fees are not deductible. If you purchase a luxury box for multiple events, only the cost of the non-luxury ticket per person can be deducted.
- Non-business guests at entertainment events. If you host a party and 4 out of 10 guests are there for business, then only 40% of the cost of the party is deductible.
6. Some other considerations:
- Cruises and family vacations. Travel and entertainment is a highly suspect area. If you are audited then this area will be closely reviewed so don’t try to write off family vacations. It is acceptable to deduct up to $2000 for conventions directly related to your trade that are held on U. S. cruise ships. This does require additional documentation to substantiate.
- Personal extensions to business trips. If your trip was primarily for business but while at the business destination you stay for a vacation or other personal activities with family/friends, you can deduct the business related travel expenses only. The amount that you can deduct, however, does include the cost of travel to and from the destination for the business activities.
- Extravagant meals. There are no set limits on this, but use reason when deciding if a fancy dinner is appropriate for deduction.
- Your daily commute. Not deductible.